Chapter

10 Data Analytics in
Accounting
 Learning Objectives
LO 10-1 Define Big Data and Data Analytics.
LO 10-2 Describe the benefits and costs of using Data Analytics.
LO 10-3 Understand the impact of Data Analytics on business.
LO 10-4 Understand the impact of Data Analytics on accounting.
LO 10-5 Describe how the AMPS model explains the data analytics process.
LO 10-6 Describe the first stage of the AMPS model—asking appropriate questions.
LO 10-7 Describe the second stage of the A MPS model—mastering the data.
LO 10-8 Describe how audit data standards are useful in sharing data between a company and its
auditors in preparation for data analysis.
LO 10-9 Define and demonstrate the third stage of the A MPS model— performing the analysis—using
different types of analysis.

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 LO 1

Big Data
Big Data is defined as datasets that are too large and complex for businesses’ existing
systems to handle using their traditional capabilities to capture, store, manage and
analyze these data sets.
The four V’s—volume, velocity, veracity and variety—are often used to represent the
defining features of Big Data.
• Volume refers to the massive amount of data involved.
• Velocity refers to the fact that the data comes in at quick speeds or in real time, such as streaming videos and
news feeds.
• Variety refers to unstructured and unprocessed data, such as comments in social media, emails, global
positioning system (GPS) measurements, etc.
• Veracity refers to the quality of the data including extent of cleanliness (without errors or data integrity
issues), reliability and representationally faithful.
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 LO 1

Data Analytics

• Data Analytics is defined as the science of examining raw data, removing

excess noise and organizing the data with the purpose of drawing
conclusions for decision making.
• Data analytics often involves the technologies, systems, practices,
methodologies, databases, and applications used to analyze diverse
business data to help organizations make sound and timely business
decisions.

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 LO 2

Benefits and Costs of the Use of

Data Analytics on Business
• Companies generally face two important limiting factors in their
business systems when dealing with Big Data: storage and
processing.
• Storage: Many companies choose to use a cloud platform to lower
the cost of data storage.
• Processing Power: The processing power required to obtain
information valuable to the company could be enormous or even
impossible.
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 LO 2

Extract, Transform, and Load

• Before data can be analyzed and be useful, it must be scrubbed from extraneous
data and noise.
• Reformatting, cleansing, and consolidating large volumes of data from multiple
sources and platforms can be especially time consuming. Data analytics professionals
estimate that they spend between 50 percent and 90 percent of their time cleaning
data for analysis.
• The cost to scrub the data includes the salaries of the data analytics scientists and
the cost of the technology to prepare and analyze the data. As with other
information, there is a cost to produce these data.

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 LO 3

The Impact of Data Analytics on

Business
• A study from McKinsey Global Institute estimates that Big Data could generate
up to $3 trillion in value per year in just a subset of industries impacted.
• With a wealth of data on their hands, companies are empowered by using data
analytics to discover various patterns, investigate anomalies, forecast future
behavior, and so forth.
• Patterns discovered from historical data enable businesses to identify future
opportunities and risks. In addition to producing more value externally, studies
show that data analytics affects internal processes, improving productivity,
utilization, and growth.

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 LO 4

The Impact of Data Analytics on

Accounting
• In financial accounting, data analytics may be used to scan the environment—that
is, by scanning social media to identify potential risks and opportunities to the firm.
• Data analytics plays a very critical role in the future of audit. By using data analytics,
auditors are able to spend less time looking for evidence, which will allow more
time for presenting their findings and making judgments.
• Data analytics also expands auditors’ capabilities in services such as testing for
fraudulent transactions and automating compliance-monitoring activities (for
example, filing financial reports with the SEC or IRS).

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 LO 5

The AMPS Model

1. Ask the Question.

2. Master the data.
3. Perform the analysis.
4. Share the story.

Figure 10.4 The AMPS Model

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 LO 6

The AMPS Model: Ask the Question 1

• “Your Data Won’t Speak Unless You Ask It the Right Questions.”
• The AMPS model starts with asking questions that can be
addressed with data and that lead to a better decision making.

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 LO 6

The AMPS Model: Ask the Question 2

Potential questions include:

• Which product is most profitable at stores in Missouri?
• Is it more profitable to produce an item in the United States or in
Mexico (or Indonesia)?
• Why are our costs increasing in the West but decreasing in the East?
• What is the probability that our audit client will go bankrupt or need to
restate its financial statements?

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 LO 7

The AMPS Model: Master the Data

Data questions include:
• Data Accessibility – can we get the needed data to answer the
question posed?
• Data Reliability – is the data clean?
• Data Integrity – is the data accurate, valid and consistent over
time?
• Data Type – is the data structured? is the data internal? are there
privacy concerns with the data?
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 LO 8

Audit Data Standards 1

• If both the provider and the user (for example, a company and its
external auditor) of the data had the same data standards for their data,
this cost of cleaning and formatting the data could be alleviated
• Audit Data Standards (ADS) is a set of standards for data files and fields
typically needed to support an external audit in a given financial
business process area.

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 LO 8

Audit Data Standards 2

Audit Data Standards provide the following benefits:

• Reduces the time and effort involved in accessing data by.
• Works well with standard audit and risk analytic tests often run against datasets in specific accounts
or groups of accounts (such as inventory or accounts receivable or sales revenue transactions).
• Allows software vendors (such as ACL Inc.) to produce data extraction programs for given enterprise
systems to help facilitate fraud detection and prevention and risk management.
• Facilitates testing of the full population of transactions, rather than just a small sample.
• Connects/interacts well with XBRL GL Standards (to be introduced in Chapter 10).

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 LO 8

Audit Data Standards 3

• Link to Audit Data Standards.

• Example of Field Attributes from the ADS General
Ledger Table.

(source:
http://www.aicpa.org/InterestAreas/FRC/AssuranceAdvisoryServices/DownloadableDocuments/
AuditDataStandards/AuditDataStandards.GL.July2015.pdf)

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Audit Data Standards 4

Flat File Flat File

XBRL GL Taxonomy
Field # Field Name Level Data for Data for Element1 Description
Data Type Length2

1 Journal_ID 1 TEXT 100 gl-cor:entryNumber Identifier that is unique for each

2 Journal_ID_Line_Number 1
3 JE_Header_Description
4 JE_Line_Description
5 Source
journal entry. May require
concatenation of multiple fields.
TEXT 100 gl-cor:lineNumber Identifier that is unique for each
line within a journal entry.
1 TEXT 256 gl-cor:entryComment Description of the entire journal
entry as described by the
journal entry header.
1 TEXT 256 gl-cor:detailComment Description of the individual
line within the journal entry.
1 TEXT 25 gl-cor:SourceJournallD Posting source (code for source
(fixed/enumerated list) or from which the journal entry
gl-cor: originated, such as sales journal,
sourceJournalDescription cash receipts journal, general
(free form) journal, payroll journal,
accountant manual entry,
spreadsheet, and so on).

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 LO 9

The AMPS Model: Perform the Analysis

The Type of Question Asked Leads to the Analysis Performed

1. What Happened? – Descriptive Analysis.
2. Why Did It Happen? – Diagnostic Analysis.
3. Will It Happen in the Future? – Predictive Analysis.
4. What Should We Do, Based on What We Expect Will Happen? –
Prescriptive Analysis.

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 LO 9

Descriptive Analytics

Descriptive Analysis: Analysis performed that characterizes,

summarizes and organizes past performance.
Addresses questions like:
Did we make a profit last year?
How much did we pay in federal taxes last year?
How long have the existing accounts receivable been past due?

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 LO 9

Diagnostic Analytics

Diagnostic Analysis: Analysis performed to investigate the underlying

cause of a phenomenon
Addresses questions like:
Why did advertising expense increase but sales fall?
Why did we experience an unfavorable labor rate variance last year?
Why did overall tax increase even though net income did not?

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 LO 9

Predictive Analytics
Predictive Analysis: Analysis performed to provide foresight by
identifying patterns in historical data
Addresses questions like:
What is the chance the company will go bankrupt?
What is our expected sales and income next year?
Can we predict if the financial statements will be misstated?
Will the borrower pay us back the loan we’ve granted her?

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 LO 9

Prescriptive Analytics
Prescriptive Analysis: Analysis performed which identifies the best
possible options given constraints or changing conditions
Addresses questions like:
What is the level of sales needed to break even?
How can revenues to maximized if there is a trade war with China?
Should the company lease or buy its headquarters office?
Should the company make its own products or outsource production to another
company?

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 LO9

Data Analytics Labs

Lab Number Lab Name Analysis Type

Lab 1 Accounts Receivable Aging Descriptive
Lab 2 Segregation of Duties Diagnostic
Lab 3 Predicting Bankruptcy Predictive
Lab 4 Estimating the Breakeven Prescriptive
Point

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 Summary
• The abundance of data availability gives new opportunities to analyze and
assess data in a way that helps business makers make decisions. We call
this process data analytics.
• Data analytics will increasingly be critical for business in general and for
accounting and auditing in particular.
• The AMPS model is a means of thinking about the data analytics process.
• The four types of analytics performed include descriptive, diagnostic,
predictive, and prescriptive analytics.

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End of Chapter 10